Mumbai: Goldman Sachs has laid out a road map for India to grow 40 times bigger by 2050.
A report authored by Goldman's chief economist Jim O'Neill and Tushar Poddar, vice president for research at Goldman Sachs' Asia Economic Research Team based in Mumbai, says that attention is needed in areas like governance, inflation control, basic education, infrastructure and liberalisation of financial markets, and lays out a ten-point plan for India to become the second-largest economy in just over four decades.
The report says that it would be imperative to raise the bar at current universities, and the number of universities as well. Additionally, India would need to increase foreign trade, improve environmental quality, introduce a credible fiscal policy and increase agricultural productivity.
Goldman Sachs now - famous 2004 BRICs report on Brazil, Russia, India and China that placed the Indian economy next only to China's by 2050, with a gross domestic product of $40 trillion. Goldman's economist O'Neill believes that India has a demographic advantage, but cautions that turning this potential to reality is a huge challenge, as India's growth environment score (GEC) is less than that of the other three BRIC economies.
The GEC is a measure by which Goldman evaluates the progress of growth environment in countries, assigning a score on a scale of 10 across variables. It had placed India's GEC for year 2007 at around 4.5, while China and Russia's were around 5.5, and Brazil's just over 5.
In its 10 point plan, Goldman Sachs spells out the road map saying India needs to:
- Improve governance to educate India's citizens, build its infrastructure, increase agricultural productivity and ensure that the fruits of economic growth are well established. Goldman's report says that governance problems arise from the increasing inability of the government and public institutions to deliver public services, against rising expectations, and an expanding gap between physical access to services and the quality of services provided is leading to a ''citizen satisfaction gap.''
- Raise educational achievement to help achieve the nation's potential. Goldman says that India's basic indicators show a vast number of India's young people not receiving or receiving only the most basic education. It says that a major effort to boost basic education is needed.
- Increase quality and quantity of universities for better higher education. Goldman says that the likely numbers who will be seeking higher education would be three to four times higher by 2020 than the present count of around 10 million.
- Control inflation: Goldman says India has a history of reasonable stability in terms of inflation, and formal inflation targeting should be the focal point of a clearer, more defined and credible medium-term framework for macroeconomic stability. It recommends greater independence for the Reserve Bank of India (RBI) as part of these measures. The report says that inflation targeting has delivered major benefits across a variety of countries, from 'developed' countries (New Zealand, Sweden and the UK) to 'developing' countries (Brazil, Korea and South Africa).
- Introduce a credible fiscal policy: A medium-term strategy for fiscal policy, which reduces the overall deficit to a sustainable level, is critical for India, says Goldman's report, pointing out that India's gross fiscal deficit remains amongst the highest, with recent government liabilities increasing at alarming rates. It says that the overall government deficit for financial year 2008-09 may accelerate over seven per cent, due to the large debt-waiver for farmers, the generous wage hike for civil servants, ballooning fertilizer and oil subsidies, and higher exemptions on income tax. Goldman says that at these high levels, government borrowing crowds out private-sector credit, keeping interest rates high and adding to an already high government debt. It thereby becomes a key source of macro vulnerability. Moreover, the report points out that expenditures are directed less towards productive investment, especially in areas such as health, education and infrastructure that could potentially enhance growth, but more on wages and subsidies.
- Liberalise financial markets: Goldman says that India's financial sector remains small and underdeveloped, on account of state dominance which holds 70 per cent of banking assets, majority of insurance funds and the entire pension sector. It says India's markets lack corporate debt, currency and derivatives, leading to a lack of credit and low financial savings. India's total credit at 50 per cent of GDP remains well below its Asian neighbours who average over 100 per cent of GDP, and China at 111 per cent of GDP. Within this, consumer credit remains abysmally low at 11 per cent of GDP compared to the Asian average of over 40 per cent of GDP. Household savings are mostly in physical assets and gold, with risk diversification channels largely unavailable. Goldman says India needs to pursue financial reforms to channel savings effectively into investments, meet funding requirements for infrastructure and enhance financial stability.
- Increase trade with neighbours: If Indians can be encouraged to increasingly think 'global', the virtuous benefits of trade with other emerging giants with large populations could be a source of considerable upside surprise for India, opines the report. It says case in point being the last decade or so, when Indian trade with the rest of the world has ballooned, and this impressive development needs to be kept in perspective, however, as it has come from an exceptionally low base. India currently accounts for no more than 1.5 per cent of global trade, and still ranks below the average of all developing countries. India's trade with China is rising sharply, and China now ties with the US as India's biggest trading partner. However, trade with China remains very low, with India taking just 1.93 per cent of China's exports, and providing just 1.46 per cent of its imports. Total trade with the US in 2007 was only $42 billion, at a time when total US trade with China was $405 billion. Indian trade with China was also just $37 billion.
- Increase agricultural productivity as it is critical not only for India to sustain high growth rates, but also to move millions out of poverty. Goldman says that currently, 60 per cent of the labour force is employed in agriculture, a sector that contributes less than 1 per cent of overall growth, while India's agricultural yields are a fraction of those of its Asian neighbours, such as the rice yields, which are a third of China's and half of Vietnam's. Goldman says better specific and defined plans for increasing productivity in agriculture are essential, and could allow India to benefit from the BRIC-related global thirst for better-quality food.
- Improve infrastructure: India's constraints in infrastructure are obvious to first-time visitors, and long-term residents, says Goldman, with examples in the form of clogged airports, poor roads, inadequate power, and delays in ports that impede growth. Goldman says Indian companies on average lose 30 days in obtaining an electricity connection, 15 days in clearing exports through customs, and 7 per cent of the value of their sales due to power outages. It says that incremental demand for infrastructure will continue to increase because of economic growth and urbanisation.
- Improve environmental quality as India's high population density, extreme climate and economic dependence on its natural resource base make environmental sustainability critical in maintaining its development path. Goldman cautions India, saying that history is replete with instances of societies that have depleted their natural resources during the course of their development, leading to severe loss of growth and in some spectacular cases such as that of Easter Island, a complete collapse of the civilisation.